ASEAN 3 Seminar on Developing Corporate Bond Markets in Asia

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ASEAN3 Seminar on Developing Corporate Bond
Markets in Asia
Session 1 Corporate Bond Markets in East Asia
Challenges and Prospects

• Mr. Masato Miyachi, Senior Advisor
• Office of Regional Economic Integration
• Asian Development Bank
• 27 September 2007
• Shanghai, PRC

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Outline

• Need to develop corporate bond markets
• Factors that support development of corporate
  bond markets
• Private-Public sector cooperation to promote
  corporate debt markets

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Advantages of corporate bond finance

• Corporate bond markets can
• Reduce the double mismatch problem (currency and
  maturity)
• Reduce over-dependence on bank borrowing and
  lower borrowing costs
• Contributes to efficient resource allocation.
• Help develop hedging instruments to mitigate
  risks

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Corporate bond market development

• Corporate bonds in ASEAN 3 countries grew 36
  last year.
• However, corporate debt markets continue to be
  underdeveloped
• Less than one-third of the over 100 countries
  with equity markets have corporate debt markets
• Corporate debt markets average only one tenth
  the size of the corresponding equity markets

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Factors that support corporate bond market
development

• Financial development often requires government
  to play a role in initial stage of bond market
  development ex. Malaysia and Korea
• Malaysia
• promoted development of needed infrastructure for
  bond market development incl. bond rating
  agencies made bond ratings mandatory
• actively encouraged Employee Provident fund to
  invest in corporate bonds to help finance
  infrastructure and energy investments
• By 2000corporate debt market in Malaysia amounted
  to 47 of GDP from just 4 in 1989

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Factors that support corporate bond market
development (1)

• Korea
• Korean government first approved Capital Market
  Promotion Act of 1968
• In 70's, government introduced guaranteed
  corporate bonds and ensured that corporate bonds
  issued by the industrial conglomerates (chaebols)
  carried bank guarantees
• By 2000, corporate debt market rose to 26 of
  GDP from 11.1 in 1989

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Factors that support corporate bond market
development (1)

• Government support for the development of the
  corporate bond markets in MAL and KOR were
  substantial and sustained
• Relatively rapid development of bond markets in
  MAL and KOR suggest that government support is
  important for bond market development at least in
  initial stage
• However, government interventions should be
  carefully designed to avoid problems.
•  

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Factors that support corporate bond market
development (2)

• Presence and robustness of institutional
  investors
• Diversified institutional investors (pension,
  insurance, mutual funds) key to development of
  debt markets
• Presence of defined contribution schemes creates
  long-term savings that may create demand for
  long-term debt securities

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Factors that support corporate bond market
development (3)

• Presence of large companies within the economy
  contribute to development of bond markets
• Financially sound firms with good historical
  performance
• Able to issue bonds regularly and on large enough
  scale
• Accurate, reliable and timely information on
  these firms available to market

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Factors that support corporate bond market
development (3)

• Corporate debt markets can only develop if there
  is active involvement of banks in development of
  debt markets
• Banks oppose development of debt markets bec. of
  potential competition
• Highly concentrated banking systems may succeed
  in frustrating development of corporate bond
  markets

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Factors that support corporate bond market
development (3)

• Complementary relationship between banks and
  corporate debt market
• Promote more active role of banks as issuers,
  investors and intermediaries of bond markets
• Encourage banks to lead efforts in niche markets

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Public-Private Sector Cooperation in Developing
Corporate Bond Market

• Financial sector stability is the key word
• Constructive partnership bet. govt, banks,
  corporate sector in creating diversified and
  competitive financial sector
• Sustained government support in development of
  corporate bond market
• Creating benchmark yield curve
• Strengthening institutional investors
• Adopting outward looking policies

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Public-Private Sector Cooperation in Developing
Corporate Bond Market

• Firms need to adopt to rapid changes in the
  international market to remain competitive
• Make data on bond prices and quantities available
  on real-time
• Develop professional information services

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Public-Private Sector Cooperation in Developing
Corporate Bond Market

• Fostering complementary relationship between
  banks and corporate bond market
• Promote supportive role of banks in corporate
  bond market development
• Continue to strengthen banking system at the same
  time initiate development of corporate bond
  market by removing barriers

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Malaysia Bond Market Experience
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Malaysia Bond Market Experience

• Malaysia Capital market Development Blueprint

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Malaysia Bond Market Experience
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Learnings from Malaysian Experience
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Learnings from Malaysian Experience

• Deliberate and planned effort to develop the
  Malaysian government and commercial bond market
• Efficient and well-functioning market
  infrastructure
• All rules and regulations to ensure the
  functioning of an orderly market were issued and
  enforced

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Thank you

• For More Information
• Mr. Masato Miyachi, Senior Advisor
• Office of Regional Economic Integration (OREI)
• Mmiyachi_at_adb.org
• 63-2-632-6832